Banking Regulation, Core Principles
On 6 July 2023, the Basel Committee on Banking Supervision (BCBS) solicited public comments on the revision of the Core Principles for Effective Banking Supervision (the "2023 Core Principles"). The Core Principles are a programmatic document issued by the Basel Committee on Banking Supervision to improve the effectiveness of banking supervision in various countries, and can be called the "constitution" of international banking supervision. Since it was first published by BCBS in 1997, it has been revised three times in 2006, 2012 and 2023. Prior to this revision, the Core Principles had not been revised for nearly 10 years. Therefore, this revision will also have a far-reaching impact on the future thinking of banking supervision in various economies around the world.
The revisions will be launched in April 2022 and will be drafted for comments in July 2023. On the whole, the revision of the BCBS updates part of the Core Principles in accordance with the Basel Accord and other international banking supervision rules over the past 10 years, and on the other hand, the Core Principles are revised in accordance with the development of the financial system and the assessment of the FSAP.
Specifically, compared with the 2012 Core Principles, the 2023 Core Principles proposes revisions to six aspects:
In terms of financial risk, the Basel Accord has incorporated the leverage ratio requirements, large risk exposure requirements, and counterparty credit risk management and control requirements previously added to the Basel Accord into the Core Principles, and included in the Core Principles the impact of the expected credit loss method on the management of banks' risk exposures and the revision of the criteria for identifying related parties.
In terms of operational robustness, there is an increased focus on operational risk management, business continuity planning and testing, third-party dependency management, incident management, cybersecurity, and information and communications technology (ICT).
In terms of systemic risk and macro-prudential supervision, it is mainly required to strengthen the cooperation and coordination between different regulatory authorities, make it clear that the regulator should fully assess the systemic risk of the banking system, and at the same time explicitly include the regulator's right to require banks to maintain additional capital (such as sectoral capital requirements) to cope with the greater impact on the banking system.
In terms of new risks such as climate and digitalization, two new types of risks, climate risks and potential risks brought about by financial digitalization, are included in the regulatory framework. Regulators in all economies are explicitly required to consider climate risks in their regulatory processes, requiring banks to establish comprehensive risk management policies and procedures for climate risks, and to include climate risks as part of their internal control frameworks. In addition, in view of the new challenges brought about by digitalization, it is emphasized that it is necessary to pay attention to the risks caused by the excessive concentration of some third-party service providers in the banking system.
In the case of non-bank financial institutions, it is explicitly required that regulators should remain vigilant against the risks arising from the activities of non-bank financial institutions and their potential contagion impact on the banking system.
In risk management practices, banks are explicitly required to establish a sound risk culture, conduct risk management practices on an ongoing basis, and implement sustainable business models.
In addition, in the revision of the Core Principles, the 7 additional standards of the 2012 version have been upgraded to necessary standards to adapt to the current development of financial regulation.
On 6 July 2023, the Basel Committee on Banking Supervision (BCBS) solicited public comments on the revision of the Core Principles for Effective Banking Supervision (the "2023 Core Principles"). This article reviews the historical evolution of the Core Principles and, on this basis, compares and analyzes the main differences between the 2023 Core Principles and the most recent version (2012 Edition, hereinafter referred to as the "2012 Core Principles"). I. The Core Principles for Effective Banking Supervision (hereinafter referred to as the "Core Principles") is a programmatic document issued by the Basel Committee on Banking Supervision (BCBS) to improve the effectiveness and uniformity of banking supervision in various economies, and can be called the "Constitution" in the field of international banking supervision The revision will also have a far-reaching impact on the future thinking of banking supervision in economies around the world. The Core Principles were first published by BCBS in 1997 and revised three times in 2006, 2012 and 2023. Among them, the most recent revision was launched in April 2022 and formed a draft for comments in July 2023. In April 2022, the BCBS established the Basel Core Principles Task Force, composed of members of the BCBS and the Basel Consultative Group, to review and revise the Core Principles. This includes representatives from BCBS committees and non-committee member economies, as well as representatives from the International Monetary Fund (IMF) and the World Bank. In this revision, the BCBS reviews and revises the Core Principles based on regulatory developments in recent years, structural changes in the banking system, and the results of the Financial Sector Assessment Program (FSAP) since 2012. Since its promulgation in 1997, the Core Principles have been used by international organizations and financial regulators of major economies. Not only are the regulators of BCBS and its member economies using the Core Principles to develop banking regulatory frameworks and assess the effectiveness of their banking regulatory frameworks, but the International Monetary Fund and the World Bank have also adopted the Core Principles as part of the Financial Sector Assessment Program (FSAP) to assess the effectiveness of banking supervision in various countries. It is important to note that the Core Principles are in fact the minimum standards for the practice of banking regulation in economies around the world. Similar to Basel, the Core Principles are not legally enforceable, but they are intended to provide a basic set of reference standards for regulatory authorities across economies and to improve the comparability of banking supervision across economies. Therefore, most of the member economies and non-member economies of BCBS have set up their banking supervision with reference to the requirements of the Core Principles. The BCBS also makes it clear that the Core Principles are the de facto minimum standards for effective prudential supervision of banks and the banking system around the world. Therefore, with special exceptions, economies should be subject to banking supervision standards that are at least no less than those required by the Core Principles. The 1997 edition of the Core Principles was born in the context of accelerating financial liberalization and increasing financial risks. After the 70s of the 20th century, the western developed countries have relaxed financial regulations, which has encouraged financial innovation and enriched the financial product system to a certain extent. However, financial innovation has accelerated the process of financial globalization, and financial risks and contagion have also risen. Against this backdrop, there is a growing need for a set of common international standards for banking supervision in order to improve the resilience of national countries and the global financial system. In 1997, BCBS first proposed the Core Principles[1] (hereinafter referred to as the "1997 Core Principles"), which provided a comparable and practical regulatory framework for the unified supervision of banks since then. In October 1999, in order to facilitate the implementation and evaluation of the 1997 Core Principles, BCBS issued the Core Principles Assessment Methodology[2] (hereinafter referred to as the "Assessment Methodology"), which elaborated the more abstract principles in the 1997 Core Principles in a more concrete manner and served as a supporting document to the 1997 Core Principles. The 1997 edition of the Core Principles and the Core Principles Assessment Methodology contain a total of 25 principles, each of which consists of 169 essential criteria (ECs) and 58 additional criteria (ACs), mainly covering the preconditions for effective banking supervision effective banking supervision), banking licensing and structure, Prudential regulations and requirements, Methods of ongoing banking supervision, Information requirements, formal powers of supervisors, cross-border banking, etc. Among them, the Essential Standards (ECs) refer to the minimum baseline requirements that should be universally applicable to the effective conduct of banking supervision practices in all economies, and the Additional Standards (ACs) refer to the best regulatory practices that encourage the adoption of more complex banking practices in economies. Regulators often encourage (but not oblige) banks to move closer to the highest regulatory standards, or even eventually adopt best regulatory practices. In view of the significant changes in the banking regulatory system since 1997 and the accumulation of rich regulatory experience in various countries through the implementation of the Core Principles, in 2004, BCBS initiated the review of the 1997 Core Principles and Assessment Methodology, and issued the 2006 Core Principles in October 2006. In the 2006 Core Principles [3], on the one hand, the BCBS supplemented and improved the relevant contents of the previous 1997 Core Principles in accordance with the new changes in the international financial environment and banking management after 1997, and on the other hand, it also strengthened the consistency between banks and various institutions such as securities and insurance in terms of anti-money laundering and transparency. Compared with the 1997 version of the Core Principles, the 2006 Core Principles have been revised in six main aspects: first, the new principle that clearly requires banks to establish a risk management system, that is, requiring banks to establish a comprehensive risk management system (including the supervision of directors and senior management) commensurate with its scale and complexity, so as to identify, assess and monitor various major risks; Principles of operational risk and risk management of bank book interest rates; third, it has supplemented the principled requirements for strengthening the transparency, governance structure and accountability mechanism of the regulatory authorities; fourth, it has improved the principled requirements for the internal control of banks; fifth, it has supplemented the principles on the supervision of financial fraud, anti-money laundering and terrorist financing; and sixth, it has added the content of requiring the regulatory authorities to strengthen cross-industry and cross-border regulatory cooperation and information exchange. In 2011, the Basel Committee on Banking Supervision began to study the major changes that have taken place in the field of global financial supervision since 2006, absorbing the results of banking supervision reform after the global financial crisis, and revising the 2006 version of the Core Principles in combination with the results of FSAP evaluations over the years, and published an official draft in 2012. Compared with the 2006 Core Principles, the 2012 Core Principles integrate the original Core Principles and Assessment Methodology into a comprehensive document, and increase the original 25 principles to 29 and the evaluation criteria from 208 to 247. Compared with the 2006 Core Principles, the 2012 Core Principles mainly absorb important elements of international financial regulatory reform after the global financial crisis. After the outbreak of the international financial crisis in 2008, the international community began to reflect on the concept and supervision of banks, which is manifested in four aspects: first, it has increased the attention to systemically important banks and increased the regulatory requirements for systemically important banks, second, it has paid more attention to macro-prudential issues and systemic risks, third, it has improved crisis management, recovery and resolution measures, and fourth, it has greatly improved the level of corporate governance, information disclosure and transparency of banks[4]. Overall, the 2012 Core Principles not only strengthen the requirements and methods of supervision for regulators through effective risk-based supervision, early intervention and timely supervision, but also enhance the requirements and expectations of regulators for banks. Regulators need to conduct a comprehensive assessment of a bank's risk profile, including operational risk, effectiveness of risk management, exposure to the banking and financial system, etc.
2. Major changes in the 2023 version of the Core Principles This time, BCBS proposed revisions to the six aspects of the 2012 version of the Core Principles, mainly related to financial risks, operational resilience, systemic risk and macroprudential supervision, New risks, such as climate-related financial risks and the digital isation of finance, Non-bank financial intermediation, and risk management practices) and so on. 2.1 Financial risksIn recent years, under the impact of major events such as the pandemic, the Russia-Ukraine conflict, and the turmoil in the global banking system, it has become imperative to further enhance the banking system's ability to cope with different shocks and enhance the effectiveness of financial supervision. In this context, on the basis of absorbing the key elements of financial regulatory reform after the global financial crisis, BCBS has improved and supplemented five aspects: capital adequacy ratio, credit risk, risk exposure and reserves, concentration risk and large risk exposure limit, and bank book interest rate risk. In terms of capital adequacy ratio (Principle 16), the optimized capital management framework in Basel III has been updated, and the leverage ratio indicator has been formally incorporated into the "Constitution" of banking supervision, that is, on the basis of the original risk-based approach, the new regulatory authorities have the right to adopt a simple, transparent, and non-risk-based approach to measure banks' on- and off-balance sheet risk exposure, so as to jointly limit the banking sector from increasing the level of leverage. In terms of credit risk (Principle 17), credit risk management related to counterparty risk and risks related to securitization transactions has been strengthened. Transactions that clearly indicate that the counterparty credit risk includes over-the-counter derivatives transactions, on-exchange derivatives transactions, long settlement transactions[5], and bilateral or centrally cleared securities financing transactions. Counterparty credit risk may arise from, but is not limited to, banks, non-bank financial institutions, non-financial enterprises, etc. (e.g., interest rate or foreign exchange derivatives transactions with entities). In addition, the 2023 Core Principles state that securitised products include both traditional securitized products and synthetic securitized products (or products with similar structures that incorporate common features of both), and where appropriate, regulators should provide guidance on whether a particular transaction is considered a securitisation transaction. In terms of exposures, provisions and reserves (Principle 18), in line with the relevant documents previously published by BCBS[6], a new explanation of the definition of exposures has been added to introduce provisions for expected credit losses (ECLs). Specifically, for the purposes of a bank's internal risk management, exposure refers to all amounts payable (including principal and interest) that may not be collected in accordance with the terms of the contract with the counterparty. Regulators should require banks to develop policies, processes, and methodologies to establish loss provisions and ensure appropriate and robust levels of provisions. In accordance with the accounting standards and prudential regulatory frameworks of the relevant jurisdictions, regulators have the power to require banks to make provisions for broader exposures (e.g., all exposures under the ECL framework). In addition, regulators should identify important policies such as risk classification, readiness levels, and risk exposure management approved by the bank's board of directors and regularly reviewed. In terms of concentration risk and exposure limits for large amounts of risk (Principle 19), in order to be consistent with the framework of BCBS's previous relevant documents [7], the Core Principles 2023 have revised the definitions of related counterparties and exposure limits for large amounts to clarify the scope of concentration risk. Specifically, for banks operating across borders, the large risk exposure requirements must not be lower than the relevant standards of the Basel Accord. For related-party counterparties, the Core Principles of the 2023 Edition refine the definition, i.e., two or more natural persons or legal persons should be regarded as a group of related-party counterparties if one of the following criteria is met: one party has direct or indirect control over the other party in a control relationship, and the other party is economically interdependent, and if one party encounters financial problems, the other party may also experience financial difficulties. For concentration risk, the 2023 Core Principles consider that concentration risk may arise from credit, market and other risks, i.e. excessive exposure of banks to specific assets, products, collateral, currencies or sources of funds. Credit concentration includes exposure to a single counterparty (including collateral credit protection and other commitments provided), a group of related party counterparties, counterparties in the same industry or sector of the economy or the same geographic region, and counterparties whose financial performance depends on the same activity or commodity. In addition, the definition of large risk exposure has been revised from 10% of bank capital to 10% of bank tier 1 capital. The large risk exposure to a single non-bank counterparty or a group of related party counterparties has been revised from 25% of the bank's capital to 25% of the bank's Tier 1 capital. These changes are consistent with the Framework for Monitoring Large Risk Exposures published by the BCBS in April 2014 [8]. It should be pointed out that, considering that the requirements of the mainland regulator for large risk exposure of banks are more detailed and stringent than the "Monitoring Framework for Large Risk Exposure" issued by BCBS. Therefore, the revision of the Core Principles may not have an impact on the regulatory requirements for large-amount risks in the mainland banking industry. In terms of interest rate risk on bank books (Principle 23), in order to better reflect the potential impact of customer behavior on interest rate risk assumptions, the Core Principles 2023 have made targeted adjustments to the relevant requirements. Specifically, banks should add to the assumptions of interest rate risk management models the possible impact of changes in the scale and timing of the relevant cash flows of banks and their customers on their assets, liabilities and related on- and off-balance sheet items. 2.2 Operational SoundnessIn order to ensure that banks are better able to withstand, adapt to, and recover as quickly as possible from events associated with greater business risks, including pandemics, cyber incidents, technical failures, and natural disasters, the Committee considers it necessary to revise the operational risk (Principle 25) section of the 2012 Core Principles. As a result of the revision, the name of Principle 25 was changed to "Operation risk and operational resilience". While retaining the key requirements related to operational risk, Principle 25 further strengthens the focus on operational risk management, business continuity planning and testing, and mapping of interconnections and interdependencies), third-party dependency management, incident management, and Resilient cyber security and ICT. Specifically, Principle 25 requires regulators to require banks to be able to put in place adequate operational risk management frameworks and operational resilience assurances based on their own risk profiles, risk appetite, business environment, tolerance for critical business disruptions, and emerging risks. These include, but are not limited to, subordinate prudential policies and procedures: First, timely identify, measure, evaluate, monitor, report, control or eliminate operational risks. At the same time, it can respond, respond to and recover from emergencies in a timely manner, minimize the impact of corresponding shocks on the bank's provision of critical services, and further learn from emergencies to improve operational risk management and resilience. In addition, regulators should require banks to build stronger information and communications technology (ICT) frameworks, including cybersecurity and risk management that are aligned with banks' operational risk management frameworks and robust operational approaches. Regulators should require banks to have appropriate policies and procedures in place to identify, assess, monitor and manage ICT risks. At the same time, regulators should require bank boards and senior management to regularly assess the effectiveness of ICT risk management. 2.3 Systemic Risk and Macroprudential RegulationOver the past decade, international organizations and economies have increasingly recognized the importance of macroprudential measures to supervise banks from the perspective of preventing systemic risks, and to protect the security of the financial system by identifying, analyzing, and addressing relevant systemic risks as early as possible. However, in the 2023 Core Principles, the Committee did not recommend the addition of a specific and stand-alone principle on macroprudential supervision, but instead wanted to strengthen the requirements in the existing principles to reflect judicial experience in macroprudential policy and regulation, specifically: the 2023 Core Principles in terms of cooperation and collaboration (Principle 3) and home-host relationship (Principle 13) The importance of close cooperation between the different ministries responsible for banking supervision, macroprudential policy and financial stability, both domestically and externally, was further emphasized. In particular, when implementing (including monitoring, identifying and addressing) behaviors related to banks' systemic risks, the departments implementing the specific regulatory acts should be required to establish formal or informal communication mechanisms with the relevant departments responsible for macro-prudential regulatory policies to better coordinate. In terms of regulatory approaches (Principle 8) and regulatory techniques and tools (Principle 9), the 2023 Core Principles further clarify the role of regulators in assessing and mitigating banks' systemic risk, and require regulators to develop procedures for assessing and identifying banks that are systemically important in their respective jurisdictions. Specifically, regulators are required to construct a methodology with relevant authorities to determine whether banks in their jurisdiction are systemically important. At the same time, regulators should publicly disclose relevant information, outline the process of assessing and identifying systemically important banks, and conduct such assessments on a regular basis. Among the regulatory tools, the 2023 Core Principles add a new requirement for regulators to assess the adequacy of banks' capital and liquidity levels in adverse economic environments. Regulators can stress test both individual banks and the banking system as a whole. In addition, with regard to the use of information provided by independent third-party institutions, regulators are required to further carefully assess and define the functions and responsibilities of third-party institutions. In terms of capital adequacy ratios (principle 16), a new requirement is added that regulators have the power to require banks to maintain additional capital (e.g. sectoral capital requirements) in response to a larger shock to the banking system. 2.4 Emerging Risks – Climate and DigitalizationIn the 2023 Core Principles, BCBS expects regulators in various economies to incorporate various new risks into their regulatory frameworks in a timely manner, the two most important of which are climate risks and potential risks brought about by financial digitalization. Climate-related financial risks could affect the safety and soundness of banks and have wide-ranging implications for the stability of the banking system. In order to effectively regulate and mitigate the impact of climate risks on individual banks and the banking system, the 2023 Core Principles make the following major amendments: First, revise the regulatory approach (Principle 8) and regulatory reporting (Principle 10) to clarify that regulators in each economy should consider climate-related financial risks in their regulatory processes, and that regulators should have the right to require banks to submit relevant information to assess climate-related financial risks. The second is to adjust the risk management process (Principle 15) to explicitly require banks to establish comprehensive risk management policies and procedures for all material risks, including climate-related financial risks. Principle 15 requires banks to recognise that traditional capital levels may not fully cover such risks and that the right approach is needed to manage such risks, especially as their importance increases. Specifically, it is required that banks' stress tests should reflect the latest assessment results of significant climate finance risks and emerging risks over a certain time period. The third is to adjust internal controls and audits (Principle 26) to require banks to include climate-related financial risks as part of their internal control frameworks. In addition, given the degree of heterogeneity in this area and changing practices, regulators and banks can consider climate-related financial risks in a flexible way. At the same time, technology-driven financial innovation and the digital transformation of the financial industry are changing customer behavior and the way banks deliver services. The emergence of new products, new industry entrants and the use of new technologies all present new opportunities and risks for regulators, banks and the banking system. While the BCBS believes that the risk management process (Principle 15) adequately covers many of the risks posed by digitalization to banks, it has revised some of the principles in response to the new challenges posed by digitalization. The first is the revision of Operational Risk and Operational Soundness (Principle 25) to further emphasise the importance of operational soundness, taking into account the increasing reliance of banks on third-party technical support, which will lead to additional cybersecurity risk points and the risk of excessive concentration of some third-party service providers in the banking system. The second is to align responsibilities, objectives and powers (Principle 1) and supervisory reporting (Principle 10) to ensure that regulators continue to have access to information wherever information about a bank's operations is stored (banks or third-party service providers) and to review all banking group activities, including those involving third-party service providers. 2.5 Non-bank financial institutionsIn the context of the rapid development of financial technology and the continuous expansion of non-bank financial institutions (NBFIs), the institutional composition of the financial system has undergone significant changes since the promulgation of the 2012 Core Principles. While providing financial services, the importance of non-bank financial institutions' activities to the stability of the financial system is also increasing, and even non-bank financial institutions are further increasing their contagion effect due to their interrelationship with banks, which increases the possibility of risk spillover to a certain extent. While the Core Principles focus primarily on banking supervision, the BCBS believes that regulators should remain vigilant to the risks arising from the operations of non-bank financial institutions and their potential impact on the banking system. Based on this, the 2023 Core Principles further improve the three existing principles on the basis of the previous requirements: First, revise the business scope of licensing (Principle 4), and propose that the regulatory authorities should strengthen the monitoring of the impact of different non-bank financial institutions on the overall risk profile of the banking group. In particular, the BCBS stressed that regulators should give high priority to non-bank financial institutions that will take deposits or retain client funds (e.g. in electronic form). BCBS noted that while these institutions generally apply different regulatory rules than banks, regulators should ensure that the regulatory rules used against them are appropriate to their business models and scales, and that they do not absorb deposits or retain a higher proportion of client funds than the size of the financial system as a whole. The second is to revise Responsibilities, Objectives and Powers (Principle 1) and Regulatory Reporting (Principle 10) to require banks to strengthen Group-wide supervision. Among other things, the BCBS emphasizes that the regulatory authorities have the power to require the banking legal person itself and other entities in the banking group to provide any regulatory authority with the relevant information required, including but not limited to internal management information, corporate governance information, transactions with institutions within the group (including any non-bank financial institution entities) and related party transaction information. For banks, the revision of the risk management process (Principle 15) puts forward for the first time the requirement that banks should strengthen the management of step-in risk[9] in addition to the traditional risks faced by banks. The adjustment to credit risk (Principle 17) places greater emphasis on the management of counterparty credit risk. 2.6 Risk Management PracticesBCBS believes that banks must establish a sound risk culture, conduct risk management practices on an ongoing basis, and implement sustainable business models to reflect the changing trends in risk in the medium to long term. Based on this, the following specific adjustments are proposed: In corporate governance (Principle 14), the revised Core Principles 2023 place more emphasis on establishing corporate culture and values (including establishing a remuneration system that is compatible with corporate culture and values), and requires banks to ensure that the board of directors has appropriate capabilities, diverse backgrounds and rich experience, and should regularly review the performance of board members to promote the independence of the board. Following the 2012 edition of the Core Principles, the Financial Stability Board (FSB) and the BCBS issued a series of documents related to corporate governance. Specifically, in April 2018, the FSB published "Strengthening Governance Frameworks to Reduce the Risk of Misconduct: A Toolbox for Businesses and Regulators"[10], in March 2018, the FSB published the "Supplemental Guidance to the FSB on Principles and Standards for Robust Remuneration Practices"[11], in July 2015, the BCBS published the "Corporate Governance Code for Banks"[12], and in 2014, the FSB published the "Regulatory Guidance on Risk Culture in Financial Institutions – Risk Culture Assessment Framework"[13]. Based on this, BCBS has also revised the relevant definitions to better align with the guidance on corporate governance in the above-mentioned documents. For example, the 2023 Core Principles define the "Duty of Loyalty", which is the responsibility of board members to act in good faith for the benefit of the company. The duty of loyalty will prevent individual board members from sacrificing the interests of the bank and its shareholders for their own interests or the interests of others. In terms of risk management processes (Principle 15) and regulatory approaches (Principle 8), the revised Core Principles 2023 place greater emphasis on building a risk culture, setting a risk appetite framework, and summarizing risk data. At the same time, the BCBS also called for the improvement of bank stress tests, and for the first time clarified the scope of bank stress tests. According to BCBS, bank stress tests should cover credit risk, market risk, bank book interest rate risk, liquidity risk, country and transfer risk, operational risk and concentration risk. It is worth noting that BCBS also introduces the concept of business model sustainability. The 2023 Core Principles for the first time put forward the requirements for assessing the sustainability risks of banks' business models, and pointed out that assessing the sustainability of business models is also an important part of the regulator's monitoring of bank risks. Assessing the risks of the sustainability of a bank's business model mainly includes assessing whether the bank has the ability to construct and implement a sound and forward-looking strategy that can generate sustainable profits in the long run, and whether the bank has a forward-looking perspective to construct its risk profile. In terms of related-party transactions (Principle 20), the 2023 Core Principles further refine the definition of related-party transactions, strengthen the approval process for approving and managing related-party transactions, and improve related reporting requirements. Specifically, on the basis of the original scope of related parties, relevant parties that can have a significant impact on the board of directors or senior management are included in the scope of related parties, and the concept of penetrating supervision is implemented, and the actual controllers at the upper level of the bank's major shareholders are also included in the scope of related parties. At the same time, in the case of exposure to the bank itself or the group in which the bank is located due to transactions such as liquidity facilities, the purchase and sale of foreign currencies or securities, letters of credit and guarantees, etc., a separate method of risk measurement is required to ensure the robustness of the overall group risk management, especially when the regulatory authorities consider it necessary to measure separately. In terms of disclosure and transparency (Principle 28), the 2023 Core Principles refer to the requirements of the latest Basel III Accord and specify that the disclosure standards of all internationally active banks shall not be lower than those of the latest Basel III. In relation to the misuse of financial services (Principle 29), in line with the latest requirements of the Financial Action Task Force (FATF), the 2023 Core Principles explicitly require banks to develop group-wide programmes to reduce the potential for money laundering, terrorist financing support and proliferation financing. 2.7 Changes in Essential and Additional CriteriaAs regulatory expectations have increased since the last review of the Core Principles (2011), the Working Group recommends that a number of existing Additional Criteria (ACs) be upgraded to Essential Criteria (ECs). As mentioned earlier, additional standards (ACs) are the best regulatory practice to encourage adoption in economies with more complex banking operations. Regulators often encourage (but not oblige) banks to adopt best regulatory practices and move closer to the highest regulatory standards. Conversely, the Essential Criteria (ECs) are the minimum baseline requirements for effective banking supervision practices that should be universally applicable to all economies. As the regulatory approach evolves, some of the additional standards from previous versions will be upgraded to the required standards each time the Core Principles are revised. Specifically, in this amendment, the following 8 additional standards have been upgraded to necessary standards: First, in major acquisitions (principle 7), the original first additional standard (AC1) has been upgraded to a necessary standard. AC1 requires regulators to review significant acquisitions or investments by other subsidiaries of the banking group to ensure that they do not expose the bank to undue risk or impede effective supervision. Second, in the corrective and sanction powers of the supervisory authorities (principle 11), the original additional standard 1 (AC1) and additional standard 2 (AC2) have been upgraded to the necessary standards. AC1 requires the establishment of laws and regulations to prevent improper regulation from delaying corrective actions. AC2 requires the department responsible for banking supervision to promptly notify the regulatory authority responsible for the supervision of non-bank financial institutions of the corrective measures it has taken against the bank. Third, in the consolidated supervision (principle 12), the original first additional standard (AC1) is upgraded to a necessary standard. AC1 requires that the banking regulator of an economy that allows non-financial companies to take control of banks also has the power to establish appropriate regulatory policies for the owners and management of the parent holding of the banks. Fourth, in corporate governance (Principle 14), the original first additional standard (AC1) has been upgraded to a necessary standard. AC1 requires banks to report to regulators in a timely manner when they become aware of truthful information that may negatively affect the suitability of their board members or senior management. Fifth, in the interest rate risk of bank books (Principle 23), the original additional standard of Article 1 (AC1) and the additional standard of Article 2 (AC2) have been upgraded to necessary standards. AC1 requires banks to provide regulators with the results of interest rate risk calculated by the bank's internal system in the face of standardised shocks. AC2 requires regulators to assess whether banks' internal capital measurement systems adequately reflect interest rate risk on banks' books. Sixth, in the liquidity risk (Principle 24), the original additional criterion (AC1) has been upgraded to a necessary criterion. AC1 requires that regulators have the power to require banks to disclose information on encumbered assets[14] and to set appropriate limits to mitigate the risks that may arise from these assets. Seventh, in the information disclosure and transparency (principle 28), the original first additional standard (AC1) has been upgraded to a necessary standard. AC1 requires banks to disclose relevant information that helps them understand their risk exposures in their financial reporting. Concentrate:
[1]资料来源：BCBS，《Core Principles for Effective Banking Supervision》，BIS官网[EB/OL]，1997/9/22[2023/08/22]，https://www.bis.org/publ/bcbs30a.pdf。
[2]资料来源：BCBS，《The Core Principles Methodology》，BIS官网[EB/OL]，1999/10/11[2023/08/22]，https://www.bis.org/publ/bcbs61.pdf。
[3]资料来源：BCBS，《Core Principles for Effective Banking Supervision》，BIS官网[EB/OL]，1999/10/11[2023/08/22]，https://www.bis.org/publ/bcbs129.pdf。
[4]资料来源：BCBS，《Core Principles for Effective Banking Supervision》，BIS官网[EB/OL]，2012/09/14[2023/08/22]，https://www.bis.org/publ/bcbs230.pdf。
[5] A long-term settlement transaction is a transaction in which the settlement of the transaction or the redemption of the physical goods takes longer than the standard settlement time of the transaction according to the contract and no earlier than five business days after the bank enters the transaction.
[6]资料来源：BCBS，《Prudential treatment of problem assets – definitions of non-performing exposures and forbearance》，BIS官网[EB/OL]，2017/04/04[2023/08/22]，https://www.bis.org/bcbs/publ/d403.pdf。
[7]资料来源：BCBS，《Cross-sectoral review of group-wide identification and management of risk concentrations》，BIS官网[EB/OL]，2017/04/04[2023/08/22]，https://www.bis.org/publ/joint19.pdf。
[8]资料来源：BCBS，《Supervisory framework for measuring and controlling large exposures》，BIS官网[EB/OL]，2014/04/04[2023/08/22]，https://www.bis.org/publ/bcbs283.pdf。
[9] According to the BCBS, the so-called interference risk refers to the risk caused by the bank's credit or liquidity support to its related non-consolidated entities outside of the ex-ante agreement.
[10]资料来源：FSB，《Strengthening Governance Frameworks to Mitigate Misconduct Risk: A Toolkit for Firms and Supervisors》，FSB官网[EB/OL]，2018/04/20[2023/08/22]，https://www.fsb.org/wp-content/uploads/P200418.pdf。
[11]资料来源：FSB，《Supplementary Guidance to the FSB Principles and Standards on Sound Compensation Practices》，FSB官网[EB/OL]，2018/03/09[2023/08/22]，https://www.fsb.org/wp-content/uploads/R200617.pdf#:~:text=The%20Guidance%20identifies%20three%20tools%20most%20commonly%20used,compensation%20that%20has%20already%20been%20paid%20and%20vested.。
[12]资料来源：BCBS，《Corporate Governance Principles for Bank》，BCBS官网[EB/OL]，2015/07/08[2023/08/22]，https://www.bis.org/bcbs/publ/d328.pdf。
[13]资料来源：FSB，《Guidance on Supervisory Interaction with Financial Institutions on Risk Culture – A Framework for Assessing Risk Culture》，FSB官网[EB/OL]，2014/04/07[2023/08/22]，https://www.fsb.org/wp-content/uploads/140407.pdf。
[14] An encumbered asset is an asset that additionally secures a loan, advance, or other obligation so that it can no longer be used to support liabilities to depositors and creditors.
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